China H K Co op Telecom

27 February 2004

Richard Fawcett

The Closer Economic Partnership Arrangement (CEPA) is a bilateral trade agreement entered into between mainland China and Hong Kong in June 2003 that provides preferential treatment for Hong Kong and mainland China suppliers of particular goods and services. Pursuant to six Annexes to CEPA signed on 29 September 2003, mainland China has agreed to extend preferential treatment in 18 services sectors, including telecommunications services.

With effect from 1 October 2003, any Hong Kong telecommunications provider that satisfies the requirements for being, and is certified, a “Hong Kong Service Supplier” may establish a mainland China equity joint venture, owning up to a 50% equity interest and can provide five types of value-added telecommunications services (VAS).

The CEPA benefits are only available to a service provider that is certified by the Hong Kong government’s Trade and Industry Department as a “Hong Kong Service Supplier”. The requirements for certification are that the entity must:

  • be incorporated or established under the Hong Kong Companies Ordinance, hold a valid business registration certificate and (if required by the Hong Kong Telecommunications Ordinance) hold a valid telecommunications services licence. A telecommunications services licence is required for the provision of storage and forwarding and Internet access services in Hong Kong
  • have had substantive operations in Hong Kong for at least 3 years
  • pay profits tax in Hong Kong in accordance with Hong Kong law
  • own or rent business premises in Hong Kong on a scale commensurate with its business

In addition, at least 50% of the entity’s employees in Hong Kong must be residents staying in Hong Kong without limit of stay or mainland Chinese in Hong Kong on one way permits. Finally, the nature and scope of the telecommunications services provided in Hong Kong must encompass the nature and scope of the services intended to be provided in mainland China.

The five “preferred” categories of VAS (CEPA Preferred VAS) are internet data centre services, storage and forwarding services, call centre services, internet access services and information (or content) services. These services are defined in the revised Catalogue Classification of Telecommunications Services issued by the Chinese Ministry of Information Industry in February 2003. Once a Hong Kong service provider has been certified as a Hong Kong Service Supplier, it must still obtain all necessary licences or permits to provide the CEPA Preferred VAS on the mainland.

Sino-Hong Kong equity joint ventures that provide CEPA Preferred VAS are also treated exactly the same as other Sino-foreign equity joint ventures with regard to matters such as maintaining minimum registered capital and compliance with PRC laws generally.

Comment: As a practical matter, the “preferential” treatment of Hong Kong telecommunications service providers only applies in respect of the five CEPA Preferred VAS and continues for a little over two months only. Since 11 December 2003, under the PRC’s World Trade Organisation (WTO) commitments in respect of telecommunications, all other WTO members enjoy the same treatment in respect of value-added telecommunications and paging services. In entering into CEPA, mainland China and Hong Kong had to balance their desire to promote bilateral trade with their respective WTO commitments. It is difficult to imagine either that the plans of non-Hong Kong telecommunications service providers to provide services in the mainland will be substantively affected, or that the prospects for Hong Kong telecommunications service providers will be substantially enhanced, by CEPA.

Important - The information in this article is provided subject to the disclaimer. The law may have changed since first publication and the reader is cautioned accordingly.